Why India’s economic plans are bolder than you think

After months of speculation over how India will turn its economy around, the government finally unveiled its budget for the new fiscal year. While the $290 billion budget is business friendly, it doesn’t include major policy changes many had hoped for. This has disappointed analysts, as it comes at a time when the stakes are high: India is expected to surpass China as the world’s fastest growing major economy in 2015, with gross domestic product projected to grow between 8.1% and 8.5%.

Analysts are right to expect more economic reforms, but they have also failed to recognize the pragmatism of the budget and how it could actually help India realize its economic potential more effectively than radical change. Indian Finance Minister Arun Jaitley may have urged bolder moves, saying “we have to think in terms of a quantum leap,” but the budget signals that Prime Minister Narendra Modi’s administration prefers a more gradual and achievable approach.

Critics say the government isn’t doing enough to cut spending to meet its earlier target of 3.6% of GDP over the next 12 months. Officials have committed $11.3 billion for infrastructure, which includes spending on the construction and upgrade of roads and railways. Separately,officials have essentially left governments subsidies untouched; India will spendalmost $40 billion to subsidize oil, food, fertilizer, and other items this year.

While the infrastructure spend is large, it’s justified. India is notorious for its outdated and insufficient infrastructure, which can make commercial activities more expensive, unreliable, and ultimately unprofitable. Upgrading the country’s roads and railways is critical for promoting business activity and a pre-requisite for attracting foreign investment. It’s also important for meeting Modi’s goal of ramping up manufacturing, which he sees as a cornerstone for a strong economy and which depends heavily on the transport of raw materials to factories and goods to the market.

What’s more, infrastructure spending could boost economic growth, which could then reduce spending as a percentage of GDP in later years, especially as the need for further spending on infrastructure falls over time. The lack of that foundation, on the other hand, could slow India’s rapid economic growth and endanger its long-term progress.

As for the controversial subsidies, the government’s rationale is both similar and different.

Radical reform, such as eliminating subsidies en masse, would save the government money but could deliver a massive shock to average workers, many of whom rely on these subsidies for survival. In a nation where per capita income is 88,533 rupees (less than $1,500) and at least a fifth of all people live in poverty, subsidies are an essential part of life and can’t feasibly be eliminated until the economy is robust enough to provide citizens more jobs and higher wages. That, in turn, requires more economic activity and, not coincidentally, better infrastructure.

The point is that Modi rose on the promise of American-style capitalism but seems to be realizing that India’s path to prosperity might have to be different, and needs to take into account the welfare of its most valuable resource: human capital.

At the same time, subsidies next year are slated to fall to 14% of total spending versus 16% this year, according to Bloomberg, which is a sign that the government is just pacing itself and not abandoning plans to modernize the economy. Other initiatives in the budget, such as the reduction of the corporate tax rate from 30% to 25% over the next four years, and easing of restrictions on foreign investments, should further help to broaden the economy and help the government reduce spending to 3% of GDP by 2018.

Also, the Reserve Bank of India (RBI) has just adopted inflation targeting to decide monetary policy. A dangerous by-product of rapidly growing economies and deficit spending by governments is a rise in the prices of goods and services, which harms low wage earners and can force a tightening of interest rates, thereby choking the economy. By promising to watch this important metric and change interest rates accordingly, the government is signaling that it’s prepared to adjust its policies when needed. Whether this also translates into spending cuts and more reforms remains to be seen but there’s no overwhelming reason to believe that the Modi administration is not committed to fiscal discipline at a reasonable pace.

To conclude, India’s new budget may not be dramatic, but is based on a sober assessment of the reality of a vast and complex country. That is a good thing for investors, since a growth plan based on unrealistic expectations is bound to fail, whereas one that eschews fantasy in favor of slow, steady, progress can actually succeed.

Sanjay Sanghoee is a business commentator. He has worked at investment banks Lazard Freres, Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius Capital. He holds an MBA from Columbia Business School.

Alibaba in hot water and Netanyahu before Congress — 5 things to know today

U.S. stock futures are slightly down this morning after a stellar showing Monday. Both the S&P 500 index and Dow Jones industrial average set records, while the tech-heavy Nasdaq closed above 5,000 for only the third time since the dot-com bubble of 2000.

Netanyahu will take to the floor of Congress this morning at the bequest of Republican leaders. He’s expected to reveal U.S. compromises made in its dealings with Iran in an effort to derail negotiations to curb Iran’s nuclear program. The Israeli Prime Minister fears that any compromise could lead to Israel’s nuclear annihilation. Netanyahu’s relationship with President Obama and the White House has grown increasingly tense as he undermines U.S. efforts to work with the Islamic nation. Secretary of State John Kerry is continuing those negotiations today when he meets with his Iranian counterpart in Geneva.

2. Alibaba in hot water in Taiwan.

Alibaba BABA crossed the line with Taiwanese officials after it violated investment rules by registering its business in Taiwan as a Singaporean entity, thus hiding its Chinese ownership. Alibaba was told to withdraw from the market within six months and fined $3,800. An Alibaba spokesperson told The Wall Street Journal that the company set up shop in Taiwan in 2008, before the nation allowed investment by Chinese companies. Alibaba.com’s Singapore unit is a subsidiary of its Cayman Islands-registered Alibaba.com Ltd.

3. Did U.S. auto sales heat up in February?

U.S. auto sales numbers come out today, and analysts anticipate that last month was another good period for carmakers. New car sales could reach almost 1.3 million, an 8% boost compared to February last year, according to auto research company Kelley Blue Book. That would make February the 12th straight month of sales growth. General Motors GM is expected to maintain its lead in the market share battle with Ford F and Toyota TM coming second and third, respectively.

4. Springleaf buys Citigroup’s OneMain.

Subprime lender Springleaf LEAF will shell out $4.25 billion in cash for Citigroup’s consumer finance unit OneMain Financial. OneMain is part of Citi Holdings, the unit Citigroup C created during the financial crisis to hold its unwanted assets. It has been slowly selling or closing the units within Citi Holdings as the bank looks to focus on wealthier clients. OneMain provides small loans for unexpected personal expenses like medical bills or a new washing machine. OneMain will add to Springleaf’s reach with the growing number of non-prime customers.

5. Live from Beijing … it’s Saturday night!

After 40 years on U.S. televisions, “Saturday Night Live” will launch a Chinese version in partnership with Sohu.com, which operates video streaming sites. Sohu.com already streams the U.S. version to its Chinese viewers, but now they will have their very own show featuring comedians and musicians from across China. The deal was struck by Broadway Video Entertainment, a company created by SNL creator Lorne Michaels that also produces such shows as “The Tonight Show Starring Jimmy Fallon” and “Portlandia.”

Buffett’s letter and Zuckerberg talks mobile — 5 things to know today

Wall Street stock futures are gaining this morning, and European shares have declined from their highest level in more than seven years. Asian markets closed the day mostly higher.

Over the weekend, Warren Buffett published the 50th annual letter to Berkshire shareholders. In it, he told the group he had found his successor. Speculation has mounted among Berkshire investors over who will eventually succeed the 84-year-old. Here are some of the best one-liners from Buffett’s letter.

On CNBC this morning Buffett reiterated his view that Hillary Clinton will be the next president of the United States. He first made the prediction at Fortune’s Most Powerful Women summit last fall. Watch his appearance (and prediction) again here:

Here’s what else you need to know about today.

1. Business leaders gather in Barcelona for the Mobile World Conference.

The world’s biggest annual cellphone conference kicks off today. Already, Qualcomm QCOM and Intel INTC have introduced new biometic security technology that would use readings from the human body — such as a fingerprint or a facial reading — to allow access to devices instead of traditional passwords.

The more than 85,000 attendees are getting ready to hear keynotes from two Americans who hold impressive sway over the future of the mobile industry: Facebook FB CEO Mark Zuckerberg and U.S. Federal Communications Commission Chairman Tom Wheeler. Zuckerberg will discuss expanding Internet access in developing countries, while many will be hoping Wheeler will discuss the FCC’s recent adoption of net neutrality rules.

NXP NXPI paid nearly $12 billion in cash and stock to acquire Austin, Tex.-based Freescale Semiconductor FSL, which will help expand its reach in chips made for cars. The deal values Freescale at $36.14 a share, almost equal to the company’s closing price of $36.11 on Feb. 27, reported Bloomberg. The merged company will have about $10 billion in annual sales, making it the world’s eighth-largest chipmaker. As cars continue to get more advanced and require more processors and electronics, NXP and Freescale are set to benefit. The additional scale will help expand market share and reduce costs, the companies said.

3. Russia and Ukraine meet to discuss energy.

European Union leaders are hosting both Russian and Ukrainian leaders in Brussels today to broker energy talks between the two nations. Gas supplies have been used as a weapon in the conflict, as Russian threatens to cut off gas to Ukraine as a shaky ceasefire remains in place in east Ukraine. If Russia cuts off the gas deliveries, it could affect other European nations as well, since Ukraine is a key transit route into the EU.

The Chinese central bank cut interest rates again in a surprise move as the nation pursues ever more aggressive measures to rev up economic activity. The People’s Bank of China cut rates by a quarter of a percentage point nearly four months after the last reduction. The world’s second-largest economy has been struggling with a slumping property market, capital drains that are affecting banks’ lending capacity and fears of impending deflation. The unexpected rate cut bolstered Asian markets today, though many worry about China’s “new normal” of slower growth. Chinese leadership will address the issue with new policy goals for the year when the new legislative session starts Thursday.

Billionaire and Berkshire Hathaway CEO Warren Buffett released his annual letter to shareholders on Saturday. The note, full of Buffett’s famous folk wisdom, also gave hints as to who may be next in line to take over the top leadership role if Buffett were to pass away or step down. Buffett, who celebrates his 50th year at the helm of his company, said that that Berkshire Hathaway’s BRK board has identified his successor but didn’t reveal his or her identity. Vice Chairman Carlie Munger, in a separate note, hinted that either Ajit Jain, an insurance executive at the company, or Greg Abel, head of Berkshire’s energy unit, would take over as CEO.

It’s official (sort of): India to overtake China as fastest-growing major economy

It’s official, sort of. After 20 years of breakneck growth, China is going to pass the title of the world’s fastest growing big economy to India this year.

New projections out of New Delhi Friday confirmed that the government expects gross domestic product to grow by over 8% next year, rising to over 10% in subsequent years (albeit, the government’s fiscal year runs from April to April, rather than being a calendar year).

Delhi’s forecasts come as China’s growth is slowing down, as the authorities switch their emphasis from export-oriented manufacturing to more domestically- and service-based activities. However, China’s economy remains more than twice as large as India’s, meaning that it, rather than India, will remain Asia’s powerhouse for the foreseeable future.

Sources: IMF, country estimates

“India has reached a sweet spot—rare in the history of nations—in which it could finally be launched on a double-digit medium-term growth trajectory,” the government’s Economic Survey said. “This trajectory would allow the country to attain the fundamental objectives of ‘wiping every tear from every eye’ of the still poor and vulnerable, while affording the opportunities for increasingly young, middle-class, and aspirational India to realize its limitless potential.”

The survey is traditionally a document that forms the basis for the country’s annual budgets, and the latest edition, penned by the internationally-respected economist Arvind Subramanian, urged Finance Minister Arun Jaitley to use the favorable conditions to deliver the bold reforms promised by Prime Minister Narendra Modi in his election campaign last year.

India’s growth slowed significantly after the financial crisis but has appeared to recover in the last year on optimism that Modi will make the country more open to investment and cut bureaucracy. However, he has struggled to deliver much in the way of reforms so far, and much of the improvement in the economy appears more down to the collapse in world oil prices, which has helped cut its troubling current account deficit.

Why China is making life miserable for big U.S. tech

On Sunday night, Citizenfour, a film about Edward Snowden holed up in a Hong Kong hotel room revealing the global spying programs run by the U.S. National Security Agency, won the Oscar for best documentary for its chilling portrait of technology and surveillance.

Three days later this week, in China, news surfaced that the country has removed from a central government purchase list some of the largest U.S tech firms implicated in the very affairs revealed by Snowden, including most notably Cisco Sistems CSCO, but also Apple Inc AAPL, Citrix Systems CSTX, and Intel’s INTC McAfee security business.

The companies were recently stripped from a China central government approved purchase list for small contracts, according to an analysis of the government-procurement list by Reuters. The number of approved foreign tech brands on China’s purchase list fell by a third. A Cisco spokesperson says the company can continue to sell to Chinese governments, while an Intel spokesperson says McAfee did not apply for this year’s list.

Whether China is really worried about U.S. tech firms jeopardizing state security, or if it’s simply using the Snowden news as pretext for favoring domestic technology firms, is being debated. But U.S. companies being banished from the government purchase list clears up any doubt that China is an oppressive market for big U.S. tech firms.

China reacted almost immediately after Snowden divulged the NSA programs in mid-2013. Cisco said afterwards its China business had slowed to a crawl, in part because its IT-equipment was associated with spying. (It was later reported that the NSA intercepted Cisco routers to install surveillance equipment without the company’s knowledge, which Cisco CEO John Chambers later complained about to President Obama.) Last year, Microsoft’s Windows 8 was banned from Chinese government computers for what the government said were security concerns. Today, the country is trying to cleanse key industries in banking, state-owned enterprises, and the military from U.S. technology by 2020, according to reports.

China hasn’t explicitly banned U.S. tech products, but it has gradually distanced itself from foreign tech. Earlier this month, China’s banking regulator said it was planning to require source code from any suppliers of IT products used by its banks. That is greeted as a nonstarter by Microsoft Corp MSFT IBM IBM, and Cisco. If approved, the rule would effectively shut them out of billions of dollars of contracts. Industry analysts say the Chinese are years away from building their own equipment on par with say, Cisco’s, but they are getting closer.

The stripping of Cisco and Apple from the approved government list is the latest salvo in an ongoing tech conflict between the U.S. and China. The U.S. has similarly discriminated against Chinese telecommunications equipment makers for “state security” reasons. In 2012, a U.S. congressional committee warned that Huawei products could be used for spying—a charge the company continues to deny—but did not release evidence to support its claims. Huawei, the biggest telecom infrastructure maker in the world, can’t bid for U.S. government projects or large U.S. telecom contracts. ZTE ZTCOY, the second largest telecom infrastructure maker in China, is similarly banned.

In China, the situation has grown so poor for foreign IT that Cisco, in its latest quarterly results announced two weeks ago, said China sales dropped by 19%. Cisco’s public relations department won’t even directly address the topic of discrimination in China.

Except for Apple, which posted record sales in large part because its iPhone 6 dominated China’s market, there’s little reason to expect future good news for big U.S. tech in the Middle Kingdom. Snowden changed the dynamics in an already uneasy relationship. Now the effects are showing.

Correction: Story has been updated to reflect that companies were removed from a Chinese government approved purchase list, but not banned from government contracts.

China drops Apple, Cisco & Intel for state purchases

China has dropped some of the world’s leading technology brands from its approved state purchase lists, while approving thousands more locally made products, in what some say is a response to revelations of widespread Western cybersurveillance.

Others put the shift down to a protectionist impulse to shield China’s domestic technology industry from competition.

Chief casualty is U.S. network equipment maker Cisco Systems Inc CSCO, which in 2012 counted 60 products on the Central Government Procurement Center’s (CGPC) list, but by late 2014 had none, a Reuters analysis of official data shows.

The number of products on the list, which covers regular spending by central ministries, jumped by more than 2,000 in two years to just under 5,000, but the increase is almost entirely due to local makers.

The number of approved foreign tech brands fell by a third, while less than half of those with security-related products survived the cull.

An official at the procurement agency said there were many reasons why local makers might be preferred, including sheer weight of numbers and the fact that domestic security technology firms offered more product guarantees than overseas rivals.

China’s change of tack coincided with leaks by former U.S. National Security Agency (NSA) contractor Edward Snowden in mid-2013 that exposed several global surveillance program, many of them run by the NSA with the cooperation of telecom companies and European governments.

“The Snowden incident, it’s become a real concern, especially for top leaders,” said Tu Xinquan, Associate Director of the China Institute of WTO Studies at the University of International Business and Economics in Beijing. “In some sense the American government has some responsibility for that; (China’s) concerns have some legitimacy.”

Cybersecurity has been a significant irritant in U.S.-China ties, with both sides accusing the other of abuses.

U.S. tech groups wrote last month to the Chinese administration complaining about some of its new cybersecurity regulations, some of which force technology vendors to Chinese banks to hand over secret source code and adopt Chinese encryption algorithms.

The CGPC list, which details products by brand and type, is approved by China’s Ministry of Finance, the CGPC official said. The list does not detail what quantity of a product has been purchased, and does not bind local government or state-owned enterprises, nor the military, which runs its own system of procurement approval.

The Ministry of Finance declined immediate comment.

“We have previously acknowledged that geopolitical concerns have impacted our business in certain emerging markets,” said a Cisco spokesman.

An Intel spokesman said the company had frequent conversations at various levels of the U.S. and Chinese governments, but did not provide further details.

Apple declined to comment, and Citrix was not immediately available to comment.

Industry insiders also see in the changing profile of the CGPC list a wider strategic goal to help Chinese tech firms get a bigger slice of China’s information and communications technology market, which is tipped to grow 11.4 percent to $465.6 billion in 2015, according to tech research firm IDC.

“There’s no doubt that the SOE segment of the market has been favoring the local indigenous content,” said an executive at a Western technology firm who declined to be identified.

The executive said the post-Snowden security concerns were a pretext. The real objective was to nurture China’s domestic tech industry and subsequently support its expansion overseas.

China also wants to move to a more consumption-based economy, which would be helped by Chinese authorities and companies buying local technology, the executive said.

Policy measures supporting the broader strategy include making foreign companies form domestic partnerships, participate in technology transfers and hand over intellectual property in the name of information security.

Wang Zhihai, president and CEO of Beijing Wondersoft, which provides information security products to government, state banks and private companies, said the market in China was fair, especially compared with the U.S., where China’s Huawei Technologies, the world’s largest networking and telecoms equipment maker, was unable to do business due to U.S. security concerns.

Local companies were also bound by the same cybersecurity laws that U.S. companies were objecting to, he added.

The danger for China, say experts, is that it could leave itself dependent on domestic technology, which remains inferior to foreign market leaders and more vulnerable to cyber attack.

Some of those benefiting from policies encouraging domestic procurement accept that Chinese companies trail foreign competitors in the security sphere.

“In China, information security compared to international levels is still very far behind; the entire understanding of it is behind,” said Wondersoft’s Wang.

U.S. stock futures are little changed this morning after the S&P 500 closed at a record yesterday, and the tech-heavy Nasdaq index finished up nearly 5% on the year as it climbs to levels not seen since the Internet bubble burst 15 years ago. European markets are slightly lower in trading today, while Asian shares ended mostly up.

Earnings in focus today include reports from Target TGT and Salesforce CRM, which reports after the market closes.

Here’s what else you need to know about today.

1. Yellen, day two.

Federal Reserve Chairman Janet Yellen goes before the House Financial Services Committee today following her testimony in the Senate yesterday. She said that the Fed would signal any upcoming changes in interest rates, which are being considered on a “meeting-by-meeting basis.” A rate hike could come as soon as June, although investors expect it to come later in the year given Yellen’s sentiment. Yellen also came prepared to oppose the current “Audit the Fed” legislation proposed by Republican Senator Rand Paul — a move that’s about power not transparency, explains Fortune’s Chris Matthews.

2. Abercrombie & Fitch case heads to the Supreme Court.

The U.S. top court will hear arguments today concerning workplace discrimination by Abercrombie & Fitch ANF when it refused to hire a Muslim applicant who was wearing a head scarf during the interview. The teen clothing retailer said the hijab didn’t comply with the company’s dress code. The Supreme Court will decide if Abercrombie’s action was legal, as well as answer questions about who is responsible for addressing conflicts between an employee’s religious practices and a company’s policies.

3. Apple found guilty in patent case.

A Texas court said Apple must shell out $532.9 million after a federal jury found the tech giant guilty of patent infringement. The jury agreed that Apple AAPL had illegally used three patents owned by Smartflash in its iTunes software. Smartflush, a company based in Texas, doesn’t make any products itself but considers itself a patent licensing company. Apple balked at the decision and promised “to take this fight up through the court system,” according to a company press release.

4. HSBC goes to Parliament.

HSBC HSBC has faced a rough few weeks. First, it was revealed that the bank is sheltering tax-free accounts of arms dealers and politicians in its Swiss branch. Then, the CEO’s own tax affairs came under scrutiny when it came out that his bonus was moved between Switzerland and Panama to avoid detection. Now, two top HSBC executives will face a grilling by UK lawmakers over allegations that the bank helped clients evade taxes. Lawmakers want to know how extensive the problem may be and what the bank is doing to curb the issue.

5. China manufacturing improves.

China’s manufacturing sector unexpectedly improved in February after a dismal four-month streak. The HSBC Purchasing Managers’ Index rose to 50.1 from January’s 49.7, any result above the 50-mark indicates expansion and anything below that number means manufacturing is contracting. This is the first time in four months that China’s manufacturing expanded. That’s better, but there’s still worrying underlying data. Factory employment fell for the 16th straight month and both input and output prices declined. Domestic growth is likely to remain muted as the central bank seeks to spur growth with further stimulus.

Can Apple win China in a market of cheaper smartphones?

As China’s economy slows down, Apple AAPL could face problems of its own in the world’s second largest economy. Depending on which measures you believe, Chinese technology giant Xiaomi recently became the largest seller in the smartphone market, taking a market share of 13.7% during the last three months of 2014 compared to 12.3% for Apple during the same period, according to market intelligence firm IDC. While an alternate report by Canalys shows Apple as the top seller, another research firm, Kantar WorldPanel, also ranked Xiaomi as the market leader.

Beyond these reports, Apple’s phones continue to be popular in China. The company saw explosive growth during the last quarter, but Xiaomi’s ascendance could become a headache for the iconic American brand, as it has for the biggest Android phone maker in the world, Samsung SRX. In 2014, Xiaomi’s market share in China jumped by 186% from the previous year, while Samsung’s declined by 22% during the same period.

Xiaomi’s competitive advantage? Price.

While the average price of an iPhone 6 rose to $687 at the end of last year, the average price of Android phones fell to $254 – a significant gap. Xiaomi’s phones, which have a similar design aesthetic to Apple’s but runs on a modified version of the Android system, are even cheaper at an average price of $220 per phone.

The fact that Chinese consumers have a significantly cheaper option could impact Apple sales if China’s economy remains sluggish and consumers become increasingly cost-conscious. In 2014, China’s economy slowed to 7.4%, the lowest level in decades, and is expected to slow down further in the next few years, according to the International Monetary Fund.

This is especially significant because China is one of Apple’s key markets. Even though the company did not sell more phones in China than in the U.S. in 2014, as analysts initially speculated, its sales are reportedly on track to get there, partly due to its partnership with leading telecom provider China Mobile. In addition, the approximately 700 million smartphone users in China represent a vast market opportunity for Apple’s future growth.

It’s a safe bet that Apple will continue to see hefty profits from the region, but fast growing competition from Xiaomi and other Chinese smartphone makers like Huawei could slow that progress and represents a threat to be taken seriously; and not just because of the impact in China either.

As Xiaomi expands its presence internationally, the popularity of its low-priced smartphones could impact Apple in other large markets, too, especially those where per capita income is low and a cheaper alternative to the iPhone is attractive.

In India, for example, which is the fastest growing smartphone market, Apple only has a 2% market share because of a high price point, which makes it extremely vulnerable to competition. Xiaomi also has a modest market share of 4% so far. However, the important metric is that 64% of smartphones shipments during the fourth quarter were priced at less than $200, according to research firm Canalys. That’s a price range Xiaomi would find much easier to match than Apple.

On the flip side, Apple could potentially benefit from regulatory hurdles that Xiaomi faces, such as in India where a court ruled that the Chinese company can’t sell phones that violate Swedish phone maker Ericsson’s patents until further hearings (although Xiaomi is temporarily back on Indian e-commerce site Flipkart). Another factor in Apple’s favor is that its status as a luxury brand in emerging markets, combined with its marketing expertise, could enable it to keep market share despite higher prices.

What all this means is that while Apple will certainly remain one of the dominant players in the global smartphone arena, emerging competition from aggressive low-cost technology companies like Xiaomi could still make a serious dent in Apple’s growth trajectory in some of its biggest markets.

Sanjay Sanghoee is a business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius Capital. Sanghoee holds an MBA from Columbia Business School. He does not hold shares of Apple, Samsung, Xiaomi, or Huawei.

Alibaba, Qualcomm, JPMorgan: China is no country for the fainthearted business

Managing the risk of doing business in foreign countries is no walk in the park for American corporations and investors. In the case of China, with its arbitrary government, lack of transparency, and endemic corruption, political and regulatory risks are not only a fact of life, they cost U.S. businesses and investors dearly.

Three recent but unrelated incidents illustrate the need to rethink – and reprice – the risks of doing business in China.

The first one involved Alibaba, China’s high-flying e-commerce giant, which had a record U.S. IPO last September. At the end of January, a Chinese regulator – the State Administration of Industry and Commerce (SAIC) – stunned Alibaba’s acolytes when it admitted that, prior to the company’s IPO, it held a private meeting with Alibaba’s executives over several sensitive regulatory issues, in particular the sale of counterfeit goods on Alibaba’s sites. Neither Alibaba nor SAIC disclosed this event to the public before the IPO. Alibaba also failed to mention this event in its IPO filing with the U.S. Securities and Exchange Commission (SEC).

The troubling news of Alibaba’s undisclosed meeting with the SAIC coincided with the company’s fourth quarter revenue miss, sending its shares down by almost 10%. On February 13, the SEC asked Alibaba for information regarding its pre-IPO meeting with the SAIC. Several security lawsuits have also been filed against the company.

Compared to Qualcomm, the U.S. chipmaker, investors in Alibaba should consider themselves lucky. In the same week the SEC contacted Alibaba, Beijing fined the San Diego-based Qualcomm a record $975 million for violating China’s monopoly law. What was Qualcomm’s sin? It is simply too successful in the Chinese market.

Unfortunately, Qualcomm’s gain is viewed as China’s loss. Beijing aspires to become a world leader in semiconductors and reportedly has committed $170 billion in government funding to unseat American chipmakers like Qualcomm and Intel. Protectionist measures, such as anti-monopoly enforcement against foreign firms, can help build China’s champions.

Meanwhile, J.P. Morgan has seen its reputation sullied as the result of its “Sons and Daughters” hiring program in Asia. Set up to increase its investment banking business in Greater China, the program offered employment opportunities to children of Chinese officials and businessmen to gain favors with their parents (several other leading Western banks use similar tactics). The Department of Justice (DOJ) and the SEC have been investigating the U.S. banking giant’s hiring practices in China over concerns that it violated the U.S. Foreign Corrupt Practices Act. Several senior J.P. Morgan executives in Asia have left the firm. According to a recent story in The Wall Street Journal, J.P. Morgan will likely pay a fine and commit to reform its hiring practices in a settlement with the DOJ and SEC.

These three cases illustrate different risks – cronyism, arbitrariness, and corruption – that lurk in China’s business landscape.

Cronyism, the incestuous ties between Chinese authorities and well-connected businesses they are supposed to regulate, can trip up American investors who mistake regulatory partiality as business acumen. In a marketplace free of biased enforcement practices, it is impossible to conceive that an e-commerce platform like Alibaba could sell counterfeit goods without suffering severe consequences. Yet the behind-the-scenes meeting between the Chinese regulator and Alibaba reinforces the investment community’s fears that business success in China depends less on what you do than who you know.

Arbitrariness, as shown in the outsize fine against Qualcomm, has always been a concern for American firms doing business in China. Chinese authorities have a habit of interpreting and enforcing laws and rules in ways that fit their needs and interests. The only difference now is that the stakes are much higher, as the Chinese market has become a critical source of growth for American companies. Qualcomm, for instance, derives half of its revenue from China. The dependence of American firms on the Chinese market gives Chinese authorities even more leeway in imposing fines or extracting concessions.

The corruption risk, as highlighted by the J.P. Morgan case, is also well known to American businessmen. Many Chinese officials habitually demand personal benefits as a condition for approving deals. This culture of corruption puts Western firms in an impossible position. If one of them wins a deal by paying off a Chinese official, this firm will have a competitive advantage, forcing other firms to adopt the same corrupt practice. That is why many brand-name Western banks have hiring practices like J.P. Morgan’s “Sons and Daughters.”

Sadly, the risks of cronyism, arbitrariness, and corruption are not likely to go away any time soon. Western firms will need to think of ways to protect themselves. They can demand greater regulatory scrutiny of Chinese firms listed on Western exchanges to enforce transparency. They can also ask their governments to intervene on their behalf. They need to establish codes of ethical conduct against potentially corrupt practices.

As for investors, they should raise the risk premium of companies doing business in China. The market value for companies with China-based growth should be discounted to reflect their China-specific risks.

Minxin Pei is the Tom and Margot Pritzker ’72 Professor of Government at Claremont McKenna College and a non-resident senior fellow of the German Marshall Fund of the United States

Why the Chinese government doesn’t want its people watching “The Big Bang Theory”

China loves Sheldon Cooper. The fictional physicist who popularized the term “bazinga” is the star of CBS’s CBS hit show The Big Bang Theory, which used to be the most popular Western broadcast on China’s many streaming sites. But he’s become increasingly hard to find.

In December, China’s State Administration of Press, Publication, Radio, Film, and Television (known, inelegantly, as SAPPRFT) announced that the days of unfettered online video were over. Internet video regulator Luo Jianhui said that streamed sitcoms and movies should be subject to the same oversight as traditional media. That means the removal of sex, violence, extramarital affairs, and basically anything else Chinese viewers like.

One of the government’s primary targets was clear: foreign shows. House of Cards,The Walking Dead, and Downton Abbey are some of the hottest online programs and represent a big potential market for the entertainment industry. But much of the content runs afoul of state rules, and predicting how they will be enforced is almost impossible.

The streaming censorship campaign started this past spring when the government told web portal Sohu.com and others to remove four American shows, including The Big Bang Theory. “Which is kind of weird,” says Jiong Shao, who runs Macquarie’s telecommunications, media, and technology banking unit in Hong Kong. As far as contraband goes, The Big Bang Theory is fairly inoffensive—particularly compared with House of Cards, which has some unflattering story lines about a corrupt Communist Party insider. But the show’s sheer -popularity might be threatening in itself, experts say. In mid-January of this year, the cleansing continued: U.S. shows including Agent Carter, Empire, and Showtime’s Shameless were summarily banned.

The regulator’s actions represent a sharp shift in China’s relations with the American entertainment industry. Three years ago, it seemed, Beijing was starting to make nice with Hollywood, as pirated content was removed from the web. Western studios were soon raking in $100 million a year through licensing deals with streaming platforms like Youku Tudou, Tencent Video, and Sohu. Now some fear the rapprochement is over.

“It’s going to be tough for foreign content in the coming years,” says Jeremy Goldkorn, director of Danwei, a research firm in Beijing. The longtime China media watcher says there are clear signals from regulators that there will be even greater restrictions to come. “[TV producers] will have to deal with the demands of hypersensitive and paranoid censors, put up with popular shows suddenly being yanked from the Internet, and face pressure to censor content that is not even intended for Chinese audiences,” says Goldkorn.

Adding to the frustration, the streaming sites had been a rare success story for Hollywood and China. Started as China’s answer to YouTube, Youku transformed itself into a big spender, licensing everything from South Korean dramas to the ABC hit Modern Family. While the vast majority of Chinese users don’t pay to watch ad-supported shows, the small segment that does is growing. According to Macquarie’s Shao, just 0.1% of Youku users pay for premium subscriptions. That figure should increase to 5% for most sites over the next few years, he predicts, following the trend of other “freemium” sites, meaning the industry could reap $1 billion in profits.

Three of China’s homegrown tech giants—Baidu, Alibaba, and Tencent—have sunk big money into online streaming. Alibaba and its founder, Jack Ma, spent $1.2 billion last year for an 18% stake in Youku; Baidu runs iQiyi; and Tencent’s video selection is growing rapidly: In November it inked a deal with HBO to stream shows. But if China’s government continues slowing the role of Western studios in the sites’ growth, it is likely to be a bad Hollywood ending on both sides of the Pacific.